In response to the international financial crisis that began in Asia and subsequently spread to
other continents, finance ministers and central bank governors from a number of systemically
significant economies commissioned three reports on strengthening the international financial
architecture.1 The first report focused on enhancing
transparency and accountability, the second on strengthening financial systems, and the third on
managing international financial crises. The reports were published in October 1998, and
interested parties in the private and official sectors were invited to provide comments.

Written comments were received from a number of interested parties, including
non-governmental organisations, public sector officials, academics and students. In addition, some
individuals, groups and private firms responded to the reports' recommendations through their
own studies, without explicitly providing comments to the secretariat. The concerns and
suggestions of those who provided written comments as well as those whose studies have come
to the attention of the secretariat are summarised below (see the annex for a list of
contributors).

Two themes emerged from the comments and suggestions. First and foremost, interested
parties suggested that the reports gave inadequate consideration to the challenges posed by capital
account liberalisation, and more specifically to the case for controls on short-term capital inflows.
Prudential controls on capital inflows were seen as particularly important for maintaining financial
stability in countries with underdeveloped financial systems. Second, further consideration was
needed of incentives to implement international standards. Monitoring compliance through, for
example, Transparency Reports was welcomed, but some interested parties suggested that
sanctions may also be needed, such as conditioning access to financial assistance from the
International Monetary Fund (IMF) on a country's adherence to international standards.

In many areas, comments and suggestions from interested parties foreshadowed initiatives by
the official sector to follow up on and further develop the reports' recommendations. Where
relevant, recent and current initiatives by the official sector are footnoted.2

Concerns about the Process

Interested parties expressed support for efforts to reform the international financial
architecture and welcomed the opportunity to comment on the reports. A few suggested that the
focus of the reports was too narrow and that the reports should have abstracted from current
institutional arrangements to analyse the areas where market failures exist and what could be done
to address these failures. A related comment was that the reports should have looked for
commonalities between crises in emerging market economies and those in industrial countries and,
based on this more general approach, assessed the causes of instability in the international
financial system. Nevertheless, it was generally recognised that a radical reform of the
international architecture was neither feasible at the current juncture nor perhaps even
desirable.

A number of concerns were raised about the process by which the reports were prepared and
disseminated. First, the exclusion from the consultation process of many of the poorest countries
and of representatives of civil society was criticised. The poorest countries have not been as
adversely affected by the recent international financial crisis as some of the emerging market
economies, but nonetheless many of the recommendations made in the reports affect these
countries. It was suggested that a more decentralised policy-making process, that makes greater
use of regional fora, could facilitate wider participation. In addition, there were calls for the
establishment of an ongoing mechanism for inclusive dialogue between industrial countries,
emerging market economies and developing countries.3 Second, while the publication of the reports was welcomed,
it was noted that many people do not have access to the Internet and do not understand
English.4

Report of the Working Group on Transparency and
Accountability

There was broad agreement that transparency and accountability can help to prevent crises
and to resolve the crises that do occur. Recommendations for strengthening the transparency and
accountability of the private sector, national authorities and the international financial institutions
(IFIs) were strongly welcomed, but many interested parties felt that further steps were needed.
Calls for greater transparency at the IMF were especially prominent. Some also cautioned against
attaching too much importance to transparency; a more fundamental question was whether and
how investors and creditors use available information. Furthermore, it was stressed that
transparency is broader than the provision of information and refers to the openness and clarity of
the decision-making process as well.

Interested parties noted the significant improvements that the IFIs have made in the
transparency of their views and operations in recent years, and welcomed the report's
recommendation that the IFIs adopt a presumption in favour of the release of information.
Concerns were expressed by some about the report's support for using `confidentiality' as an
excuse to maintain secrecy, but others contended that confidentiality was essential to ensure
candid discussions between the IFIs and their member countries.

Numerous proposals were made by interested parties for enhancing the transparency of the
IFIs. There were calls for the agendas and minutes of Executive Board meetings at the IMF and
the World Bank to be made public so that citizens have an opportunity to hear what is said on
their behalf, and for a Transparency Report to be prepared on the IMF itself. There was
significant support for allowing countries to elect to publish their Article IV
consultations.5 And interested parties suggested
various ways in which the process by which IMF adjustment programmes are designed could be
made more transparent. These include: permitting other government ministers and
parlementarians to participate in programme discussions alongside finance ministry officials and
central bankers; making programme documents and policy papers available to the public before
they are discussed by the Executive Board, so that the Executive Board has an opportunity to
hear a wide range of views; and disseminating IMF reports, such as Letters of Intent, more widely
in programme countries. Implementation of these proposals would represent important steps
toward designing programmes that are more equitable, that better incorporate the needs of the
poor and of the environment, and that have wider support in the programme country.

The report's call for the IFIs to strengthen their evaluation processes was echoed by many
interested parties. The IMF's current external evaluation mechanism was viewed by some as
inefficient and lacking in independence. It was suggested that the IMF create an independent
evaluation unit that is adequately funded, whose staff have their careers protected, that reports
directly to the Executive Board rather than to management, and whose reports are made
public.6 The transparency of the World Bank's
Operations Evaluation Department could also be enhanced, for example by making its
Performance Audit Reports and other evaluations publicly available. Another suggestion was to
create an independent ombudsman at the IMF and the World Bank.

Regarding transparency standards for the private sector and national authorities, four avenues
for improvement were identified. First, environmental, social and labour issues could be
incorporated into international standards. Investors and creditors are increasingly recognising that
such issues can have a material impact on a firm's financial position, and indeed in some countries,
including Canada and the United States, environmental issues have been integrated into generally
accepted accounting principles. Likewise, natural resources and environmental liabilities can
significantly affect a country's long-term outlook and consequently should be measured and
disclosed as part of the Special Data Dissemination Standard (SDDS). Some interested parties
also proposed that the Code of Good Practices on Fiscal Transparency encourage governments to
disclose information about their spending on the environment.

Second, recommendations pertaining to the dissemination of external debt statistics could be
improved. It was stressed that countries should disseminate comprehensive data on the
amortisation schedule of external liabilities, including the repayment schedule of outstanding IMF
loans.7 Also, the IMF was urged to consider
further improvements in the timeliness and coverage of the reserves (a frequency of one week
with a lag of one week was suggested), external debt (by residency, maturity and currency) and
capital flows categories of the SDDS.8

Third, the transparency of hedge funds, investment banks, investment funds and other asset
holders could be enhanced.9 Interested parties
supported the report's recommendation that the modalities of compiling and publishing data on
the international exposures of such asset holders be examined, and many private sector
representatives expressed a willingness to co-operate with the official sector in this endeavour.
Some felt that onerous reporting requirements would result in hedge funds and other asset holders
moving offshore and thus recommended that the focus be on enhancing the transparency of banks'
and other counterparties' transactions with such asset holders.10,11

Finally, incentives for the private sector and national authorities to comply with international
standards could be strengthened. There was strong support for the report's recommendation that
compliance be monitored through Transparency Reports, and it was suggested that the focus of
Transparency Reports be expanded to include standards for financial supervision and regulation,
corporate governance and insolvency procedures, in addition to the disclosure standards
mentioned in the report.12 Some believed that
Transparency Reports alone do not provide adequate incentives for compliance and should
therefore be complemented with other sanctioning mechanisms, such as conditioning financial
assistance from the IMF on compliance with international standards.

Report of the Working Group on Strengthening Financial Systems

Interested parties endorsed the report's focus on the contribution that international standards
in the areas of corporate governance, internal controls, liquidity management, insolvency
procedures and banking supervision can make to the development of a robust, efficient financial
system. Many suggested, however, that the report inadequately addressed the impact of capital
account liberalisation on financial stability and incentives to comply with international
standards.

The report was criticised for not considering the contribution that capital controls could make
to the stability of underdeveloped financial systems.13 It was argued that there is a need to develop principles
to guide capital account liberalisation, with a particular focus on the sequencing of capital account
liberalisation with measures to strengthen the financial system. In industrial countries, financial
institutions' own risk-management practices, strong prudential supervision and effective regulation
generally prevent excessive risk taking by financial institutions. In emerging market economies,
these lines of defence are often underdeveloped, and thus there may be a case for buttressing
financial stability through quantitative limits or Chilean-type taxes on foreign borrowing.

Many interested parties underscored the report's recommendations for correcting structural
distortions that discriminate in favour of short-term debt. Among those distortions highlighted
were: obstacles to long-term borrowing and to foreign direct investment, regulatory practices in
industrial countries that treat short-term bank claims more favourably than long-term claims, and
weak enforcement of prudential limits on domestic banks' uncovered foreign exchange
exposure.14 Greater exchange rate flexibility
was also seen by some as a means of discouraging a large build-up of short-term external
debt.

It was stressed that strengthening the supervision of financial systems was not only an issue
for emerging market economies. Improvements were also needed in the supervision of financial
institutions in industrial countries, including oversight of hedge funds, currency traders and other
firms undertaking large cross-border transactions.15

There was strong agreement on the need to enhance international co-operation and
collaboration on financial sector issues. Some interested parties supported the report's call to
define more clearly the roles and responsibilities of the IMF and the World Bank in this
area.16 Others favoured a more radical option:
the creation of a single global financial authority to oversee the activities of institutions
participating in the international financial system.17

It was suggested that the report could have placed greater emphasis on the role of the private
sector in developing international standards and in monitoring compliance. The report
recommends that standards be developed through a broad international consultative process, as
this helps to ensure their wide adoption. Generally, only representatives of the official sector are
formally included in the consultative process; no consideration is given to whether and how the
private sector could take a more significant or even leading role in the process of standard
setting.

Several interested parties made proposals for strengthening incentives to implement
international standards. In addition to the actions identified in the report, IMF assistance could be
conditioned on progress towards compliance with international standards, interest rates on IMF
loans could be made a function of compliance, or eligibility for a pre-approved IMF credit line
could be based on compliance.18 Others noted
that implementation of international standards should be voluntary and that countries at different
stages of development will necessarily proceed at different speeds. The shortage in emerging
market economies of experts trained to implement international standards was also highlighted as
a significant obstacle to implementation.

Report of the Working Group on International Financial
Crises

There was broad support for the report's approach to the prevention and management of
international financial crises, notably its emphasis on strengthening insolvency and debtor-creditor
regimes, developing innovative debt contracts, promoting creditor co-ordination and enhancing
mechanisms to facilitate orderly debt workouts. Yet, there was less consensus about how to
implement this approach. Moreover, many interested parties felt that the report gave inadequate
consideration to the challenges posed by capital account liberalisation and to the social impact of
financial crises.

The severity of the crisis in Asia was attributed by some to, at least in part, imprudent capital
account liberalisation. Capital controls were seen by many as helpful to prevent the build-up of
financial imbalances, particularly when weaknesses exist in the domestic financial system, and to
limit contagion. It was noted that even among many industrial countries, full liberalisation of the
capital account is a relatively recent development.

It was recognised that capital account liberalisation can be beneficial for growth and
efficiency, but many felt that policymakers should differentiate between different types of capital
flows. Few argued against the liberalisation of equity investment, but there was support for
prudential controls on short-term flows. Some also saw merit in more ambitious proposals for
reducing the volatility of international capital flows, such as a Tobin-type tax on financial
transactions or George Soros' proposed insurance against default on external debt up to a
predefined limit.

More generally, a number of interested parties thought that the report could have given
greater consideration to the possible trade-offs arising from capital account liberalisation.
International capital mobility constrains the policy choices of national authorities and may lead to
`competitive deregulation'. This in turn may constrain the ability of national authorities to provide
public goods, including a cleaner environment and improved labour standards. Against these
potentially deleterious effects of capital account liberalisation are the benefits that come from
increased foreign investment, especially increased foreign direct investment.

A few interested parties suggested that the report should have expressed greater support for
exchange rate flexibility. By making currency risk explicit, flexible exchange rates may encourage
banks and firms to hedge their foreign exchange exposures and can help to deter excessive capital
inflows. Others thought that there is no one exchange rate regime that is appropriate for all
countries, and instead emphasised the importance of maintaining consistent exchange rate,
monetary and fiscal policies.

There was concern that insufficient attention was given to systemic risks arising from
excessive leverage, concentration of positions and market manipulation by hedge funds and other
HLIs. According to some interested parties, recent experience in Asia demonstrated the
potentially destabilising impact that the activities of hedge funds can have on the financial systems
of small- and medium-sized open economies. It was suggested that the IMF study on Hedge
Funds and Financial Market Dynamics be updated to take account of events since its
publication in May 1998.

Regarding the best framework for resolving financial crises, the report attempts to take a
balanced approach, recommending that the assistance and support of the IMF and the other IFIs
remain the key response to crises, yet also recommending that the contribution of the private
sector to the resolution of crises be enhanced. There was considerable support for this approach,
although a few suggested that further consideration be given to the development of a global
lender of last resort. Moreover, some expressed concern about the lead role that the report
appeared to assign to the IMF. It was suggested that some of the other IFIs could play an equally
important role in resolving financial crises, and might indeed be in a better position than the IMF.
In this context, it was suggested that regional financing mechanisms, such as the proposed Asian
Monetary Fund, could help to limit contagion. In addition, questions were raised about the
appropriate role for an international institution and its technical staff in dealing with sovereign
countries that seek its assistance. A balance needed to be established between IMF conditionality
and the outcomes of a country's political process.

Notwithstanding support for the report's general approach to crisis resolution, views differed
about how best to implement this approach. Some interested parties suggested that the official
sector should be more proactive than the report envisioned in strengthening incentives for
creditors to co-operate with each other and to participate in debt restructuring negotiations. For
example, IMF lending rates and disbursements could be conditioned on governments' willingness
to modify their international bond contracts to allow qualified majority voting, collective
representation and the sharing of litigation proceeds, and access to major financial centres could
be conditioned on the inclusion of these so-called collective action clauses in international bond
issues. Negotiations could also be facilitated, and information asymmetries reduced, through the
creation of a standing committee of creditors, but this too would require leadership by the official
sector.

While supporting greater participation by the private sector in the resolution of crises, a
number of interested parties criticised mechanisms that bind in creditors during a crisis, preferring
instead a continuous process of dialogue between creditors and debtors. It was argued that
lending into arrears and the mandatory inclusion of collective action clauses in bond contracts
would make it more difficult for debtors to access global capital markets and would thus be
counterproductive. In contrast to the report's support for the decision by the IMF Executive
Board to widen the IMF's 1989 policy on lending into arrears to encompass bonds and other
non-bank credits, some interested parties contended that IMF lending into arrears should be
avoided, apart from exceptional circumstances where private creditors supported such lending.
Collective action clauses were seen as a potentially prudent form of liability management, but it
was felt that their incorporation into bond contracts should be voluntary.

Still others suggested that a voluntary, market-based approach to crisis resolution was
inefficient, and that instead it was necessary to institutionalise procedures to sanction sovereign
defaults and to facilitate sovereign debt reschedulings. Defaults and reschedulings could be
important steps in recovering from a financial crisis, and the development of an international
insolvency regime could make these options more palatable to debtors.19 It was also argued that insolvency was a fundamental
problem in many developing and emerging market economies, and that the cancellation of external
debt was a pre-requisite for growth and development in these economies.20

A few interested parties cautioned against the rigorous application of insolvency regimes
during crises. Any disposal of assets during a crisis would likely be at firesale prices and, owing to
liquidity problems among domestic creditors and investors, to foreigners. One suggestion was for
insolvency regimes to permit discrimination in favour of residents in the event of an
economy-wide crisis.

Notwithstanding strong support for limiting the range of activities covered by government
guarantees and ensuring that those guarantees that are offered are explicit and appropriately
priced, it was suggested that it was unrealistic to expect governments to adhere rigidly to such
guidelines, especially during a crisis. Debtor and creditor governments were likely to come under
heavy pressure from powerful commercial or other interests to compensate for losses, and might
not be willing to accept the economic, political and social consequences of financial failures.
Limits on the range of activities covered by explicit guarantees might de facto result in more
liabilities being covered by implicit guarantees.

Finally, the report was criticised for not addressing the social impact of financial crises. The
report made no mention of social safety nets for the poor and other members of society who are
the most adversely affected by financial crises. It was strongly felt that minimising the human cost
of crises and helping economies strengthen their social policy responses and institutions to deal
with crises should be prominent in discussions about the international financial
architecture.21

LIST OF CONTRIBUTORS

This synopsis is based on comments received directly or indirectly from the following
institutions, organisations and individuals. Written comments not readily available from other
sources are available upon request from the secretariat (email.gavin.bingham@bis.org tel.
+41-61 280 8080; fax. +41-61 280 9100).

Asia-Pacific Economic Co-operation
Sixth Finance Ministers' meeting
Bretton Woods Project (London, UK)
on behalf of Action Aid, Catholic Fund for Overseas
Development,
Catholic Institute for International Relations, Christian Aid,
and Save the Children
Centre of Concern / Rethinking the Bretton Woods Project (Washington, DC)
Andrew Crabtree (Roskilde University, Denmark)
Barry Eichengreen (University of California, Berkeley)
European Network on Debt and Development (Brussels, Belgium)
Focus on the Global South (Bangkok, Thailand)
Friends of the Earth (Washington, DC)
Institute for International Finance (Washington, DC)
Working Group on Financial Crises in Emerging
Markets, comprising
twenty-five leading international financial firms
Working Group on Transparency in Emerging Markets Finance, comprising
nineteen leading international financial firms
Intergovernmental Group of Twenty-four on International Monetary Affairs
Sixtieth and sixty-first Ministers' meetings
Michael Lloyd (European Parliament, Brussels)

1Representatives from finance ministries and central banks of the following
economies participated in the working groups that prepared the reports: Argentina, Australia,
Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy,
Japan, Korea, Malaysia, Mexico, the Netherlands, Poland, Russia, Singapore, South Africa,
Sweden, Thailand, the United Kingdom and the United States.2In April 1999, the IMF published several documents summarising progress in
strengthening the architecture of the international financial system. See the Managing Director's
Statement to the IMF Executive Board and his Report to the Interim Committee, which are
available on the IMF website.3Since the publication of the reports, two seminars on the international financial
architecture have been held, one in Bonn in March 1999 and the other in Washington, DC in April
1999. Participation in these seminars was broadened to include not only the countries that
participated in the working groups that prepared the reports but also Chile, Côte d'Ivoire,
Egypt, Morocco, Saudi Arabia, Spain, Switzerland and Turkey.4The preface and executive summary for each of the reports have been translated
into Spanish.5In March 1999, the IMF Executive Board initiated a pilot project for the voluntary
release of Article IV reports and shortened the time limits for access to the IMF's archives. See
the IMF's Public Information Notice No. 99/36 of 16 April 1999.6An external evaluation of the IMF's Enhanced Structural Adjustment Facility
(ESAF) was completed in June 1998 and released to the public for comment. External evaluations
of the IMF's surveillance and economic research activities will be completed before the end of
1999. The IMF plans to review its experience with external evaluations towards the end of 1999
with a view to establishing a mechanism for more systematic and independent evaluations.7The IMF has begun to provide information about its level of resources and liquidity
position and is considering releasing data on programme countries' forthcoming obligations to the
IMF.8In December 1998, the IMF strengthened the SDDS in the areas of international
reserves and external debt. See the IMF's Public Information Notice No. 99/25 of 26 March
1999.9In May 1999, the Financial Stability Forum established an ad hoc working group to
recommend actions to reduce the destabilising potential of hedge funds and other highly leveraged
institutions (HLIs). The working group will present its final report to the Forum by spring 2000.
In February 1999, the International Organisation of Securities Commissions (IOSCO) established
a task force on HLIs.10In May 1999, the Financial Stability Forum established an ad hoc working group
to evaluate the uses made by market participants of offshore centres and to assess progress by
offshore centres in meeting international financial standards. The working group will present its
final report to the Forum by spring 2000.11In January 1999, the Basel Committee on Banking Supervision issued a report
analysing banks' interactions with highly leveraged institutions (HLIs), together with guidance on
sound practices in such dealings.12The IMF has published two experimental studies similar to Transparency Reports.
Australia's Task Force on International Financial Reform issued a report assessing the
implementation of international standards and other international reforms in Australia.13In May 1999, the Financial Stability Forum established an ad hoc working group
to evaluate measures to reduce the volatility of capital flows and the risks to the financial system
of excessive short-term external indebtedness. The working group will present its final report to
the Forum by spring 2000.14In June 1999, the Basel Committee on Banking Supervision issued a proposal for
a new capital adequacy framework, including changes in the risk weighting on short-term
loans.15In May 1999, the Financial Stability Forum established an ad hoc working group
to recommend actions to reduce the destabilising potential of hedge funds and other highly
leveraged institutions. The working group will present its final report to the Forum by spring
2000.16The IMF and the World Bank have established a Financial Sector Liaison
Committee to facilitate collaboration in the provision of advice on financial sector issues.17At their meeting in February 1999, finance ministers and central bank governors
from the Group of Seven established a Financial Stability Forum to promote information exchange
and co-ordination among national authorities, the IFIs and international regulatory or experts'
groupings with responsibilities for questions of international financial stability.18In April 1999, the IMF established a new financing facility, the Contingent Credit
Line (CCL). One criterion for access to the CCL is a country's progress in adhering to relevant
international standards. See the IMF's Press Release No. 99/14 of 25 April 1999.19The IMF Executive Board is considering the amendment of Article VIII, Section
2b of the IMF's Articles of Agreement to allow for the imposition of temporary stays on creditor
litigation.20The IMF and the World Bank are currently developing proposals to strengthen
the present framework for debt relief, including through the Heavily Indebted Poor Countries
(HIPC) initiative.21Minimising the human cost of crises and encouraging the adoption of policies that
better protect the most vulnerable in society was one of the topics on the agenda of the second
seminar on the international financial architecture, held in Washington, DC in April 1999. The
World Bank is developing principles of good practice in social policy.